Glover Tools has a pre-tax cost of debt of 9% and an unlevered cost of capital of 13.5%. The firm's tax rate is 34% and the cost of equity is 15%. What is the firm's debt-equity ratio?

A) .42
B) .48
C) .51
D) .58
E) .64

Question

Tinashe J Sibanda · Accepted Answer

Final Answer : C, Explanation :  The firm's debt-equity ratio can be calculated using the formula for the weighted average cost of capital (WACC) and the Modigliani-Miller Proposition II with taxes. The WACC is a weighted average of the cost of equity and the after-tax cost of debt. By setting the WACC equal to the unlevered cost of capital and solving for the debt-equity ratio, we find that it is approximately 0.51.

Glover Tools has a pre-tax cost of debt of 9% and an unlevered cost of capital of 13.5%. The firm's tax rate is 34% and the cost of equity is 15%. What is the firm's debt-equity ratio?

A) .42
B) .48
C) .51
D) .58
E) .64

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Glover Tools has a pre-tax cost of debt of 9% and an unlevered cost of capital of 13.5%. The firm's tax rate is 34% and the cost of equity is 15%. What is the firm's debt-equity ratio?A) .42B) .48C) .51D) .58E) .64

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Learning Objectives

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Related questions

Glover Tools has a pre-tax cost of debt of 9% and an unlevered cost of capital of 13.5%. The firm's tax rate is 34% and the cost of equity is 15%. What is the firm's debt-equity ratio?

A) .42
B) .48
C) .51
D) .58
E) .64